Stay up to date with free updates
Just sign up Chinese Economy myFT Digest – delivered straight to your inbox.
China announced an unexpected cut in lending rates just days after a Communist Party policy meeting, signalling efforts by the government to revive sluggish momentum across the world’s second-largest economy.
of People’s Bank of China The central bank said on Monday it was cutting the one-year prime lending rate, a widely used benchmark for business lending, by 0.1 percentage point to 3.35 percent, the first such cut since August last year.
The five-year equivalent interest rate, which influences mortgage prices, was also cut for the first time since February by 0.1 percentage point to 3.85 percent.
The cut came after the People’s Bank of China cut the seven-day rate, or the so-called reverse repo rate, used to set rates for short-term loans, by 0.1 percentage point to 1.7 percent. The bank said the move was intended to “strengthen business cyclical adjustment to better support the real economy.”
The People’s Bank of China on Monday cut interest rates on so-called standing lending facilities – loans to banks that need short-term capital – by 0.1 percentage point across all maturities.
China A long-term slump in the property market and weak domestic consumption have led banks to repeatedly cut key lending rates in recent years, and policymakers are under pressure to do more to boost investor and consumer confidence.
Official data last week showed the economy 4.7% increase The second quarter was weaker than expected, with indicators across the real estate sector worsening.
“This series of quantitatively modest but symbolically important measures signals the government’s final willingness to use macroeconomic stimulus to shore up sluggish economic activity,” said Eswar Prasad, a professor of economics at Cornell University.
The rate cut came on the heels of China’s Communist Party’s Third Plenum, a closely watched closed-door meeting where the party’s elite Central Committee sets policy direction. At this year’s meeting, which ended on Thursday, officials discussed the economy and Promised further support.
The Chinese government has been forcing state-owned enterprises to buy up unsold homes in recent months to combat a slump in the property market, but there are few signs of improvement, with new home prices falling 4.5% last month, the biggest drop in nearly a decade.
China’s interest rate setting framework has evolved significantly in recent years, with interest rates such as the LPR being linked to medium-term lending facilities set by the People’s Bank of China, affecting liquidity in the banking sector. Suggested in June Repo rates are likely to play a larger role in policy decisions in future.
Lin Song, chief Greater China economist at ING, said Monday’s rate cut “can be seen as a signal of the People’s Bank of China’s new positioning of the seven-day reverse repo rate as the key policy rate,” depending on whether other benchmark rates are also cut in the coming weeks.
Analysts warned that the impact of such cuts would likely be moderate. Prasad said the LPR cuts “are unlikely to be effective unless accompanied by fiscal stimulus and broader policy reforms to restore fading private sector confidence.”
“If the People’s Bank of China is serious about monetary stimulus, it should cut rates more substantially,” said Julian Evans-Pritchard, head of China economics at Capital Economics. “But a big cut still seems unlikely given its efforts to stabilise longer-term interest rates and limit currency depreciation.”
China’s 10-year government bond yield fell to 2.24 percent on Monday after the rate cut, and the yuan fell to its lowest in nearly two weeks at 7.28 to the dollar.
Additional reporting by Joe Leahy in Beijing
